Market Snapshot
briefing.com
| Dow | 32040.87 | +131.32 | (0.41%) | | Nasdaq | 11281.47 | +142.59 | (1.28%) | | SP 500 | 3883.99 | +22.40 | (0.58%) | | 10-yr Note | +37/32 | 3.52 |
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| | NYSE | Adv 778 | Dec 2158 | Vol 1.4 bln | | Nasdaq | Adv 1681 | Dec 2822 | Vol 6.1 bln |
Industry Watch
| Strong: Utilities, Real Estate, Health Care, Information Technology, Communication Services |
| | Weak: Financials, Energy, Materials, Industrials |
Moving the Market
-- The Fed, Treasury, and FDIC issued a joint statement to make depositors whole at Silicon Valley Bank and Signature Bank of New York, but the banking sector remains under pressure
-- Strength from the mega cap space
-- Treasury yields continue to fall in flight to safety trade
-- Rethinking the Fed rate hike at the March FOMC meeting
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Closing Summary
13-Mar-23 16:25 ET
Dow -90.50 at 31819.05, Nasdaq +49.96 at 11188.84, S&P -5.83 at 3855.76
[BRIEFING.COM] It was a volatile start to the new week for the stock market as investors digested a busy weekend of news surrounding the banking sector fallout.
Market participants learned through a joint statement from the Federal Reserve, Treasury, and FDIC that all depositors at Silicon Valley Bank and Signature Bank of New York would be fully protected even though both banks had been taken over by regulators. In turn, the Fed also introduced a Bank Term Funding Program (BTFP) that will help banks avert selling Treasury and other government securities at a loss by allowing them to offer those securities to the Fed, which will value them at par, as collateral.
Those efforts were designed to restore some normalcy to the banking system and some calm to the capital markets. Price action in banking stocks today suggested that regulators did not succeed in either regard, and that their efforts may have created a belief that this issue is bigger than previously thought.
The SPDR S&P Regional Banking ETF (KRE) fell another 12.3% and the SPDR S&P Bank ETF (KBE) fell another 10.0%. First Republic Bank (FRC 31.21, -50.55, -61.8%), Western Alliance Bancorp. (WAL 26.12, -23.22, -47.1%), Comerica (CMA 42.54, -16.27, -27.7%), and PacWest Bancorp. (PACW 9.75, -2.60, -21.1%) were among today's biggest losers in the banking space.
Still, the main indices spent a good portion of today's session in positive territory thanks to gains in some heavily-weighted components. Mega-cap companies with solid balance sheets, like Apple (AAPL 150.47, +1.97, +1.3%) and Microsoft (MSFT 253.92, +5.33, +2.1%), were favored as investors rotated capital into stocks that are seen as being removed from the fallout in the banking industry. The Vanguard Mega Cap Growth ETF (MGK) rose 0.8% versus a 1.2% loss in the Invesco S&P 500 Equal Weight ETF (RSP).
The 2-yr note yield fell 57 basis points to 4.02% and the 10-yr note yield fell 18 basis points to 3.52%, as investors recognized the potential for a less aggressive Fed in the wake of this bank fallout and the potential for it to have a disinflationary impact on the economy.
The former point was also reflected in the fed funds futures market. The CME FedWatch Tool shows a 55.4% probability of a 25 basis points rate hike at the March FOMC meeting and a 44.6% probability of no rate hike versus last week when there was a 78.6% probability of a 50 basis points rate hike.
Unsurprisingly, the S&P 500 financial sector (-3.8%) was the worst performer by a wide margin. The real estate (+1.6%) and utilities (+1.5%) sectors showed the largest gains. The health care sector, up 0.9%, was also a relative strength leader, digesting the news that Pfizer (PFE 39.86, +0.47, +1.2%) will acquire Seagen (SGEN 197.65, +25.04, +14.5%) for $43 billion or $229.00 per share in cash and Carl Icahn's proxy battle with Illumina (ILMN 226.94, +32.93, +17.0%).
- Nasdaq Composite: +6.9% YTD
- S&P Midcap 400: -1.0% YTD
- Russell 2000: -1.0% YTD
- S&P 500: +0.4% YTD
- Dow Jones Industrial Average: -4.0% YTD
Looking ahead to Tuesday, market participants will receive the following economic data:
- 6:00 ET: February NFIB Small Business Optimism Index (prior 90.3)
- 8:30 ET: February CPI (Briefing.com consensus 0.4%; prior 0.5%) and Core CPI (Briefing.com consensus 0.4%; prior 0.4%)
There was no U.S. economic data of note today.
Main indices turn lower ahead of close
13-Mar-23 15:30 ET
Dow -44.35 at 31865.20, Nasdaq +83.73 at 11222.61, S&P +2.06 at 3863.65
[BRIEFING.COM] The main indices turned lower recently, which had the S&P 500 slip below its flat line.
Former US Treasury Secretary Larry Summers told Bloomberg that there will be more financial aftershocks.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 6:00 ET: February NFIB Small Business Optimism Index (prior 90.3)
- 8:30 ET: February CPI (Briefing.com consensus 0.4%; prior 0.5%) and Core CPI (Briefing.com consensus 0.4%; prior 0.4%)
Energy complex futures settle mixed
13-Mar-23 15:05 ET
Dow +131.32 at 32040.87, Nasdaq +142.59 at 11281.47, S&P +22.40 at 3883.99
[BRIEFING.COM] Recent trading had the main indices moving mostly sideways.
Small and mid cap stocks remain under more pressure than their larger peers. The Russell 2000 is down 1.0% and the S&P Mid Cap 400 is down 1.2%.
Energy complex futures settled in mixed fashion. WTI crude oil futures fell 2.5% to $74.75/bbl and natural gas futures rose 5.7% to $2.71/mmbtu.
On an energy related note, the S&P 500 energy sector (-1.5%) is among the weakest performers today.
Moderna outperforms after TD Cowen upgrade; LUV, airlines dip
13-Mar-23 14:30 ET
Dow +132.14 at 32041.69, Nasdaq +148.23 at 11287.11, S&P +22.34 at 3883.93
[BRIEFING.COM] The S&P 500 (+0.58%) is firmly in second place to this point on Monday afternoon.
S&P 500 constituents Moderna (MRNA 148.38, +10.09, +7.30%), Newmont Goldcorp (NEM 45.31, +3.15, +7.47%), and Tyler Tech (TYL 326.76, +16.96, +5.47%) are among today's top performers. MRNA caught a TD Cowen upgrade to Outperform, while NEM is aided by today's gains in gold futures, and TYL management appeared at today's Loop Capital Markets Investor Conference.
Meanwhile, Dallas-based airliner Southwest Air (LUV 31.36, -1.41, -4.30%) is one of the non-banking names that shows solid losses.
Gold's haven appeal shines in wake of SIVB/SBNY failures
13-Mar-23 14:00 ET
Dow +125.56 at 32035.11, Nasdaq +118.03 at 11256.91, S&P +19.45 at 3881.04
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+1.06%) holds a commanding lead among the major averages.
Gold futures settled $49.30 higher (+2.6%) to $1,916.50/oz, fueled once more by safe-haven prospects as sentiment about the recent unwind at SIVB and SBNY weighs on financial markets.
Meanwhile, the U.S. Dollar Index is down about -1.0% to $103.50.
Market not convinced yet banking problem has been solved
On Sunday, Treasury Secretary Yellen, Federal Reserve Board Chair Powell, and FDIC Chairman Gruenberg issued a joint statement indicating steps will be taken "...to protect the U.S. economy by strengthening public confidence in our banking system."
One step was to fully protect all depositors at Silicon Valley Bank (SIVB) and Signature Bank of New York (SBNY), the latter of which saw its regulator take possession over the weekend, and the second step was taken by the Fed to introduce a Bank Term Funding Program (BTFP) that will help assure that banks "...have the ability to meet the needs of all their depositors."
Phew! Problem solved, right? Not exactly. One need only to look at the Treasury market to understand this problem is not solved.
The 2-yr note yield is down another 41 basis points to 4.17% and the 10-yr note yield is down 22 basis points to 3.48%. Looking at the bank stocks doesn't engender a lot of confidence either that the problem has been solved.
First Republic (FRC) is down 64% in pre-market trading and PacWest Bancorp (PACW) is down 45% even though both banks put out statements highlighting their strong capital positions. For good measure, Comerica (CMA) is down 21%, KeyCorp (KEY) is down 13.5%, Charles Schwab (SCHW) is down 9.4%, Truist Financial (TFC) is down 5.4%, Bank of America (BAC) is down 3.9%, and JPMorgan Chase (JPM) even is down 1.2%.
Yeah, this problem is not at all solved yet -- at least not in the market's mind.
One of the biggest problems here in our estimation is a credibility problem. The speed at which Silicon Valley bank collapsed makes it look like the Fed was asleep at the switch as a regulator; and to be sure, Fed Chair Powell didn't sound any alarms about banking issues in his semiannual monetary policy testimony last week.
Roger Altman said it well on CNBC earlier when he said we have a situation here where SVB Financial was not considered a Systemically Important Financial Institution (SIFI), and yet the response from officials now aligns with one that would suggest it is. President Biden is speaking now on the issue and the government's response to it.
Another problem is the advertised solution itself. When a program is put together as quickly as the BTFP was, it creates a belief that this issue is bigger than anyone thought. The effective guarantee now of all deposits has added to that thinking.
The messaging from authorities is that there will be no government bailout of the banks and that taxpayers won't bear any costs. Maybe so, but consumers will in that capital requirements for the smaller banks are apt to go up in the wake of this blowup, making the cost of credit more expensive in the future and bank lending standards more restrictive.
Those factors will be impediments to stronger growth. That understanding is contributing to expectations that economic growth will slow sharply in coming months, if not contract, which is also factoring into the rally we are seeing in the Treasury market.
The fed funds futures market is taking notice, too. The CME FedWatch Tool currently shows a 54.2% probability of no rate hike at the March FOMC meeting now and only a 45.8% probability of a 25 basis points rate hike. Shortly after Fed Chair Powell's testimony last Tuesday, there was a 78.6% probability of a 50 basis points rate hike at the March FOMC meeting.
Oh, and lest we forget, the February Consumer Price Index will be released tomorrow. That could put the market in a real tizzy if it is hotter than expected, as the Fed touting its strong commitment to getting inflation back down to 2.00% will have to contemplate raising rates at a time when it is acting as if it is dealing with a systemic banking issue.
What it has now is a credibility issue.
Notwithstanding the advertised efforts to protect depositors and to ensure banks have the liquidity they need to meet the needs of all their depositors, the S&P 500 futures are down 33 points and are trading 0.9% below fair value, the Nasdaq 100 futures are down 73 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 239 points and are trading 0.8% below fair value.
The CBOE Volatility Index is up 21.9% to 30.23.
That's looking like a market that sees a problem that has yet to be solved.
-- Patrick J. O'Hare, Briefing.com
Illumina shares illuminated today as Icahn sets sight on board shakeup to right the ship (ILMN)
Illumina (ILMN), a life sciences company that makes genetic sequencing equipment and related instruments and consumables, is soaring higher after activist investor Carl Icahn nominated three directors to ILMN's board of directors, setting the stage for an upcoming proxy battle. At the heart of the matter is ILMN's bungled acquisition of cancer detection test maker Grail, which Mr. Icahn argues has cost ILMN's shareholders about $50 bln since the transaction was completed in August 2021.
Mr. Icahn and his brash persona may not be everybody's cup of tea, but it's hard to argue against his point of view regarding ILMN's recent missteps.
- For a quick recap, Grail was originally created by ILMN, but the company spun-it off in 2016, raising $2.0 bln in the process. Before Grail could proceed with a widely-expected IPO, ILMN stepped in to reacquire the company for about $8.0 bln in 2021. The deal would provide ILMN with the remaining 85% interest in Grail that it didn't already hold.
So, right off the bat, the move looks questionable because ILMN essentially lost $6.0 bln on Grail -- an unprofitable business that only generated $55 mln in revenue last year.]
- Icahn's bigger gripe, though, is that ILMN pushed ahead with its acquisition of Grail, despite the fact that both U.S. and European regulators warned that they may not approve the deal because the merger could stifle innovation.
- Ultimately, the acquisition was cleared in the U.S., but not in the EU, where the European Commission ordered ILMN to undo the deal. As a result, ILMN was forced to hold and report Grail as a separate unit, meaning that the company couldn't directly benefit from Grail's operations or financials.
- Adding insult to injury, ILMN may have to divest Grail, which would potentially trigger billions in taxes, and it could be on the hook for a $450+ mln fine.
Considering the mess ILMN has created with its Grail acquisition, it's easy to see why investors are enthusiastic about the possibility of new leadership coming on board. The prospect of ILMN cutting itself loose from this overhang, allowing it to refocus on its core DNA sequencing business, is appealing to many investors. Of course, the three nominated directors -- Vincent Intrieri of VDA Capital, and Jesse Lynn and Andrew Teno of Icahn Enterprises -- will first need to be elected to ILMN's board. Based on the stock's surge higher today, though, it seems that ILMN's investors are more than ready for a board shakeup.
Under Armour encounters selling pressure after receiving a downgrade today from JP Morgan (UAA)
Under Armour (UAA -7%) is encountering selling pressure today after JP Morgan downgraded the firm to "Neutral" from "Overweight," citing persistent inventory overhang. Shares of the sports apparel firm have sunk roughly 15% on the year and 30% from levels reached before its underwhelming Q3 (Dec) earnings report on February 8.
Briefing.com noted after UAA's DecQ report that rising inventories could continue to erode margins over the near term. UAA's inventories spiked by 50% yr/yr during the quarter to $1.2 bln, forcing the company to implement higher markdown activity than it anticipated. The promotional activity took a significant chunk out of gross margins, which tumbled by 650 bps yr/yr to 44.2%. Furthermore, UAA expects FY23 (Mar) margins to contract toward the higher end of its 375-425 bp range.
- UAA is not the only sporting apparel manufacturer experiencing elevated inventories brought on by a softening demand landscape.
- Rival Adidas AG (ADDYY) reported a 49% jump yr/yr in inventories at the end of FY22 as market-specific challenges like the war in Ukraine, the wind-down of Russian operations, lingering COVID-19 restrictions in many countries, including China, dampened discretionary demand in Q4. Adidas's ended "YEEZY" partnership also weighed on its financial performance. As a result, Adidas's primary focus in 2023 will be to reduce inventories to build a sturdy base for 2024 and 2025.
- NIKE (NKE) experienced similar issues in NovQ. It has dealt with transitory impacts since FY21 (May) relating to two consecutive years of elevated freight costs and the cost to liquidate excess inventory in North America. The company expects to see some recovery during FY24.
- However, helping UAA navigate its inventory glut has been its prior restructuring initiative, which has produced meaningful benefits on its bottom line. For instance, UAA raised its FY23 adjusted earnings guidance to $0.52-0.56 partly due to favorable benefits related to its restructuring, such as trimming expenses.
Still, UAA's inventory woes may weigh on margins more than its peers. Part of this is due to UAA's higher exposure to retailers. Although UAA has also been stepping up its direct-to-consumer (DTC) efforts, which comprise around 40% of total sales, as this strategy boosts margins given the direct sales to the consumer instead of to retailers, its DTC growth over the past few years still lags NKE. The wholesale channel exposes UAA to pronounced weakness, especially if retailers begin having to close up shop.
UAA may be better positioned once it works down its inventory glut. The company's incoming CEO Stephanie Linnartz could propel UAA's DTC efforts given her role at Marriott (MAR), where she helped lead its digital transformation. Nevertheless, it may be better to wait on the sidelines until more clarity regarding inventory and the demand landscape is provided, likely after either NKE's FebQ earnings report on March 21 or UAA's Q4 (Mar) earnings report, which should occur sometime in late May.
Pfizer's antidote for slowing growth is M&A market, where it makes big splash with Seagen deal (PFE)
On February 27, the Wall Street Journal reported that Pfizer (PFE) was in discussions with oncology-focused biotech Seagen (SGEN) to acquire the company, just months after Merck's (MRK) acquisition negotiations with SGEN fell apart. As it turns out, those discussions were quite fruitful with both companies announcing this morning that they entered into a definitive agreement in which PFE will acquire SGEN for $229/share in cash, for a total enterprise value of $43 bln. For some context, MRK was reportedly looking to acquire SGEN for approximately $40 bln.
- PFE is paying a hefty price tag for SGEN. The $229/share buyout price represents a 42% premium to the stock's unaffected price from February 24 -- the last trading day before the Wall Street Journal article broke. Furthermore, at $43 bln, PFE is paying roughly 19.5x estimated FY23 revenue for SGEN.
- A substantial slowdown in COVID-19 vaccine sales -- Comirnaty sales decreased by 9% in Q4 -- and looming patent expirations for some of PFE's largest drugs, including Xeljanz in 2025 and Eliquis in 2026, has the company scrambling to replace the lost sales. More specifically, PFE has turned to the M&A market to reignite its growth, purchasing Biohaven Pharma last October for $11.6 bln, preceded by Global Blood Therapeutics and Arena Pharmaceuticals for $5.4 bln and $6.7 bln, respectively.
Its proposed acquisition of SGEN, however, is by far PFE's biggest bet and it has the potential to be a game changer, instantly bolstering its cancer drug portfolio.
- The crown jewel of SGEN is its four FDA-approved oncology drugs: Adceteris (non-Hodgkin lymphoma), Padcev (urothelial cancer), Tivdak (cervical cancer), and Tukysa (breast cancer), which all together generated total sales of $1.7 bln in FY22. SGEN is known as a pioneer of Antibody-Drug Conjugate (ADCs) cancer treatments, which are designed to home in on and kill cancer cells, while steering clear of non-cancerous cells.
- What's especially alluring about SGEN is that it's just getting started in developing its ADC-based drug portfolio. For instance, last December, SGEN announced the FDA acceptance of supplemental Biologics License Applications (sBLAs) for Padcev and MRK's Keytruda for the first-line treatment of certain patients with locally advanced or metastatic urothelial cancer. In total, SGEN has over nine studies at various stages that are testing ADCs with immunotherapies
Although the addition of SGEN wouldn't move the top-line needle too much in the near-term, given that PFE's projected to generate $69.5 bln in sales this year, it could become a significant contributor several years down the road. In fact, by 2030, PFE believes that SGEN could contribute more than $10 bln in revenue, with the potential for significant growth thereafter.
In the meantime, the acquisition isn't expected to be accretive to adjusted EPS until the third to fourth year after closing the deal. The lofty price tag and the addition of $31 bln in new long-term debt to help finance the deal will act as headwinds to PFE's earnings until it can achieve significant cost efficiencies from the acquisition.
Overall, investors are cheering this deal as it would transform PFE into an oncology powerhouse, providing the stock with its next major growth catalyst. Whether this deal ultimately receives regulatory clearance, though, is another story. On that note, shares of SGEN are trading about 12% below the $229/share acquisition price, reflecting investors' skepticism that this transaction will be completed.
Insulet gets a nice boost as insulin delivery company joins the S&P 500 (PODD)
Insulet (PODD +7%) is getting a boost today on news it will join the S&P 500, effective prior to the open on Wednesday. It will be replacing SVB Financial (SIVB) in the S&P 500. This is a nice feather in the cap for this supplier of an insulin delivery system for people with diabetes.
- It has been a productive year for Insulet. In August, it launched its fifth generation platform, called Omnipod 5. Basically, Omnipod 5 is a tubeless wearable disposable insulin patch pump that also brings automated insulin delivery (AID) to the market. It's the only tubeless, waterproof, pod-based AID system and the first to offer full compatible smartphone control with constant cloud-based connectivity. This means doctors don't have to wait for data to be uploaded when a patient visits a physician.
- Also, with Omnipod 5, customers no longer need to plug-in their devices to access their data. Its smart bolus calculator helps patients manage their blood glucose levels and trends, and there are no other AID systems that include the adaptive algorithm that Omnipod 5 has. The device learns each customer's specific usage and then predicts their trends and automatically personalizes their care. Omnipod 5 is now Insulet's flagship product.
- Insulet says it saw tremendous growth in its US market for Omnipod 5 in 2H22 on top of what was already strong growth internationally. PODD says it was able to win back thousands of customers in Q4 who had once been Podders and returned when Omnipod 5 became available. Insulet intends to launch Omnipod 5 in the UK (around mid-year) and Germany (2H23). In late February, Insulet reported huge upside with its Q4 results with solid Q1 and FY23 guidance.
- Looking ahead to 2024, Insulet plans the commercial launch of its new basal-only pod. Insulet believes this will be a unique product for the type 2 market and will provide the company with early entry into the treatment experience and help patients become comfortable with the Omnipod on-body experience. Insulet estimates the total addressable market for its basal-only pod is approximately 3 mln people in the US alone, doubling its US TAM.
Joining the S&P 500 is a nice capstone for that has been a great year for Insulet. Launching Omnipod 5 has been a big success. And given the huge EPS beats in both Q3 and Q4, it seems analysts still need to catch up on the potential for this new product, which has become Insulet's flagship product. The strong beats and now the S&P 500 inclusion should get the name on even more radar screens.
Roku slips after disclosing ~26% cash balance at SIVB; situation not as grim as it appears (ROKU)
Roku (ROKU) is amid some selling pressure today after disclosing that approximately 26% of its cash and cash equivalents were held at SVB Financial (SIVB) on Friday after the close. The streaming hardware and software firm possessed around $1.9 bln in cash as of March 10, meaning that roughly $487 mln is held at SIVB. Given the size, ROKU's reserves at SIVB are mostly uninsured, stoking fears that the company will report a considerable loss of funds, driving today's downward pressure.
ROKU's ~26% cash balance held at SIVB puts it toward the top of the list of companies with the most exposure to SIVB by a substantial margin. ROKU has yet to comment on why it had such a significant percentage of its cash on hand in one bank. In fact, ROKU did not offer too many comments on the situation, noting that at the current time, it does not know to what extent it will be able to recover its deposits at SIVB.
- Although this remark was highly concerning, management alleviated some fears by stating that it believes its existing cash on hand and cash flows will be sufficient to meet its working capital, capital expenditures, and other expenses associated with known contractual obligations for the next 12 months and beyond.
- Additionally, there have been multiple reports that certain hedge funds and banks may be looking to purchase deposits held at SIVB for anywhere from $0.60 to $0.80 on the dollar. If this were to occur, ROKU's worst-case scenario would be a $194.8 mln loss. Even though this is still not exactly a rosy outcome, it is far better than a $487 mln loss suggested by some headlines.
- During its Q4 earnings call in mid-February, ROKU outlined how it would be more cost-disciplined, continuously lowering its yr/yr operating expenditures growth rate as it progresses through FY23. With adjusted EBITDA of negative $95 mln in Q4, $40 mln above its target, management felt confident that its early success would result in positive adjusted EBITDA in 2024 with continued improvements after that. ROKU reiterated this goal last week. With ROKU focused on driving down its operating expenses if SIVB's despots were to be purchased at a discount, ROKU's long-term goal may not be materially impacted.
Still, ROKU's meaningful tie-in with SIVB is not helping its turnaround story, especially given the softening advertising demand environment. Incorporating today's move, shares of ROKU currently trade around 40% lower over the past 52 weeks and over 80% below record highs seen in 2021. ROKU's shift toward achieving profitability is encouraging. However, with strong economic headwinds continuing to linger, fierce competition, and ROKU's dependence on TV manufacturers choosing its operating system, we think it would be better to employ a wait-and-see strategy.
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